What is a Currency?

Currencies are normally issued by governments and are backed either by a
commodity or by a legal mandate. But Bitcoin is backed by neither. In
fact, it does away with a financial intermediary almost entirely.
Unlike Paypal or other online monies, Bitcoin is peer-to-peer exchange
of "tokens." The Bitcoin transfer protocol is the only intermediation
that occurs.

"The process also lets people conduct transactions with virtual (but not
complete) anonymity, perhaps the biggest key to its success so far.
And as online transactions continue to grow and online data theft
becomes a more common occurrence, bitcoin backers see an opening for
the system."

"The bitcoin system is designed so there will
never be more than 21 million bitcoins in existence. Every four
years, the number of new coins that will spring into existence--or be
mined--will be cut in half, until the supply is exhausted in
approximately 2030. After that, the only way to get bitcoins will be via
exchanges. (At present, there are about 6.6 million in circulation.)."

"The value of bitcoins in real world
dollars fluctuates wildly--often as much as 8 percent per day. As little
as two months ago, the exchange rate was $1 USD per bitcoin. That was
before the mainstream world learned about them, though--which sent their
value through the roof. Speculators quickly saw potential in this
new currency and began buying them through Mt. Gox and other sites.
Given the currency's instability, that led to rapid inflation and the
currency value peaked at nearly $28 on June 9. These days, you can
expect to pay somewhere between $15 and $20 per bitcoin."